Cohu, Inc. (COHU) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Cohu Analyst and Investor Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Jeff Jones, Chief Financial Officer. You may begin. [Presentation]

Good morning or good afternoon, and welcome. My name is Jeff Jones, and I'm Cohu's Chief Financial Officer. We're glad you could join us today, and we look forward to walking you through the Cohu growth strategy and recently expanded financial model. Before I go further, I'd like to call your attention to our safe harbor statement and remind everyone that this presentation is being recorded and will be available for future viewing in the Investor Relations section of our website at cohu.com. Today's presentation will last approximately 40 minutes, followed by about 45 minutes of Q&A. Our CEO, Luis Muller, will start by sharing an overview of our markets and strategy. Next, our executive team will provide more details about our plans and how we differentiate in fast-growing markets and applications. I'll conclude the presentation with an overview of our financial results and 3-year financial target model. Then we'll move to the Q&A session. Now I'll turn it over to our President and CEO, Luis Muller.

Hello, and thanks for joining us. Our main topics today will center around raising the bar and business performance. We'll discuss served markets, our products and explain Cohu's strategy for profitable growth. The team will expand on the dynamics in each segment and how Cohu is aligning to secular trends. They'll share specifics on product differentiation and unique value delivered to our customers. Jeff will wrap up with a recap of the last few years' results and reinforce how we'll manage the business to achieve the target financial model and drive shareholder value. At a glance, Cohu delivered progressively stronger results over the last several years. Revenue grew an impressive 26% CAGR, ending fiscal 2021 at $887 million, and with a strong balance sheet. We support a large installed base of equipment across many blue-chip customer names, leading to opportunities to create growth with new products and services. Cohu is uniquely positioned to solve our customers' most complex test and inspection challenges. We have a differentiated and broad product portfolio, including semiconductor testers, interface products in test and vision automation, and currently serve approximately 20% of a large addressable market. The opportunities are many, but we focus on the mega market trends that most benefit from our technology. At our core, Cohu is a technology-driven company, and we win with innovation. Cohu is well positioned financially with a healthy balance sheet and a scalable model to deliver through-cycle profitability. We're acutely focused on growing by delivering best-in-class premium products and services that expand gross margin and shareholder value. Cohu is a leader in each of our business verticals. Today, we will discuss the 4 segments driving Cohu's targeted growth to $1 billion revenue. Semiconductor test systems is introducing differentiated products to broaden the addressable market. Inspection & Metrology is successfully delivering on a strategy launched a few years ago. We'll also discuss Cohu's large recurring revenue that includes test interface and services. This is the first time we described Cohu's service business in its steady revenue and high gross margin profile. Finally, we'll not talk today about our already well-known automation business, which encompasses test handlers, thermal subsystems, MEMS test modules and semiconductor assembly automation. We're a leader in these markets, and we will leverage our position into growth opportunities for the premium products and services we'll describe next. Our goal is simple. We're aligning the organization to the largest end-market opportunities where we can provide differentiated products and customer value, namely higher test yield. These are well-understood applications across the semiconductor industry, spanning high-performance computing, automotive, industrial and communications. In aggregate, a $4.4 billion addressable market for Cohu. Starting from a 2021 baseline, we target to deliver mid-teens compound annual growth rate from the strategic product groups. The services vertical reflects steady growth bolstered by our high-margin data analytics software. Equally important is to have clarity on why we win business. The team will explain the technology innovation in our products. They will provide quantified examples of yield and productivity benefits. But here, I want to touch on a different value, the one coming from the strength of our organization. We don't only deliver innovative products, we focus on satisfying our customers' production ramps. We know they must be competitive. And for that, they need to rely on our total support. This means quickly ramping capital equipment deliveries and flawlessly executing in the installations. Ensuring our customers achieve target yield and productivity early is Cohu's key competitive advantage. Cohu's infrastructure spans the globe. It is not surprising that most of our product installations are in Asia, where our customers have factories. We too manufacture products in the region and have a large field and applications engineering organization that is local to customers. Our global footprint, the strong balance sheet, trusting management and innovative products are keys to winning business. The Cohu management team is committed to continue the journey, not only growing revenue but even more importantly, driving gross margin expansion. We invest in premium differentiated products, have done so organically with a large commitment to R&D over the years, and at times, also through acquisitions that help accelerate execution of our strategy. Circling back to the beginning. This team is focused on executing the plan to grow revenue to $1 billion over 3 years and drive gross margin and profitability to new levels. Today, we'll provide more details on the strategy for each of our growth factors, including what's driving market growth, what differentiates our products and services and why we win business. Thank you for your time. And now I would like to introduce Ian Lawee, Senior Vice President and General Manager for Cohu Semi Test business. Ian?

Thank you, Luis, and hello, everyone. Today, I'll provide an update on what's driving accelerated growth in the markets we serve, how we differentiate with our products and expand on recent design wins and plans to further diversify and grow beyond RF front-end module test. Our strategy is to focus on mixed signal ICs that contain digital RF, analog and power technologies. These are the underlying technology drivers of well-known secular market trends. Electric cars have 3x the semiconductor value of gas vehicles. Driver assistance and safety ICs are forecasted to double by 2025. These trends are driving increased analog sensing and power management content in batteries and powertrains. RF bandwidth are expanding in smartphones, and content is proliferating to consumer and industrial applications. Concurrently, the increase in data rates is roughly doubling test intensity per device. In the computing and networking markets, we intentionally don't target high-performance processors as part of our SAM, but we do test the peripheral mixed-signal devices. We are executing our strategy to diversify beyond RFM and into analog, power management, RF IoT systems and microcontrollers. Orders outside of RFM are fueling recent 30% annual growth in Cohu's Semi Test business, primarily from design wins over the past 1 to 2 years for our Diamondx platform. This rapid expansion of Diamondx sales have more than doubled the installed base with gains in display driver ICs, analog ASSPs for data storage and power management for multiple end markets. Diamondx is a universal platform well suited for customers of broad product portfolios. We have a differentiated solution over competitors who offer dedicated systems that are optimized for just a single device market. We have a much lower cost solution over competitors attempting to sell high-end digital platforms to mixed-signal portfolio customers. In summary, we provide a high-density mixed-signal test platform with midrange digital instrumentation at lower cost of test. Cohu's strategy is to focus on large customers with a broad portfolio of mixed-signal products. These customers are stretched with ever-increasing device complexity and the need to be cost competitive in high unit volume growth markets. The Diamondx universal air-cooled platform is cost- and performance-optimized for the many low pin count devices that dominate our customers' portfolios. We are also rapidly expanding the instrumentation capability in analog RF and power management, bringing valued solutions to market often ahead of our larger competitors. I outlined 2 recent design wins to demonstrate why customers are adopting the Diamondx. A leading U.S. IoT customer switched from a competitor's liquid-cooled universal platform to the Diamondx for testing a UWB device. We delivered to this customer better test time and more instrument channels at an equivalent cost, all without sacrificing gross margin. These advantages yielded 4x higher throughput on the Diamondx test cell over the competitor's liquid-cooled system. The second example is from a customer who has recently transitioned from a dedicated power tester to our universal platform. Diamondx delivered improved cost of test for their power devices and ultimately, a more scalable and higher utilization solution to address this customer's entire power and broad mixed-signal portfolio. Cohu is investing in disruptive technologies and customer application support to expand in the analog device segment. We have steadily penetrated 10 of the top 15 market leaders, in some cases, as their primary tester supplier, while in other is establishing a foothold, testing a subset of their portfolios. We are excited by the opportunities to grow in the $650 million ATE segment and already started delivering incremental design win orders in Q1 of this year. We offer a more cost-efficient solution to address the growing test intensity requirements, providing higher density instruments and the flexibility of the universal platform solution. We have several ongoing R&D investments in this segment, releasing new instruments and software to intercept customers' evolving technology requirements and cost challenges over the next 2 years. Changing customer requirements is also driving new business in the approximately $275 million power management segment. Data centers and vehicles, for example, are transitioning to higher power distribution systems. Diamondx already offers a suite of power instruments, and we have in development next-generation, high-power, high-density instruments to further penetrate the list of leading IC customers. The Internet of Things is expanding to many end nodes, the vast majority being low-power wireless. There are a series of standards here such as Wi-Fi, Bluetooth and emerging narrowband and ultra-wideband IoT. Certain semiconductor manufacturers are providing the entire signal chain, including RF, microcontrollers and power management technology. So they value a flexible test platform. In addition, as opposed to the cellular IC signal chain, these devices run at lower performance digital, combined with mixed-signal capability. Customers select the Diamondx because it hits the sweet spot for their portfolio strategy. The Diamondx delivers leading-edge RF and power management instruments with midrange digital, lowering the overall cost of test for these IoT devices, enabling scalability as these technologies mature. In summary, we are focused on a mixed-signal market that is growing to $1.8 billion with increased test intensity in analog, RF and power content, combined with midrange digital. Our differentiated universal platform and instrumentation offers best-in-class throughput and cost performance. Recent design wins validate our diversification strategy is working. We will be rolling out a series of new instruments over the coming years that will increase the Diamondx differentiation for large mixed-signal portfolio customers. Thank you for your time. And now I'd like to introduce Devin Sheridan, Vice President and General Manager of Cohu's Interface Solutions business.

Thank you, Ian, and hello, everyone. Today, I'm going to talk about our growth opportunities driven by increasing test intensity in each of our core markets. This starts with automotive, where we are well positioned to serve electrification and ADAS and extends to 5G in the data center where our RF technology lowers cost of test. Additionally, we have extended our RF technology to wafer test, where our probe cards solve major challenges in high-frequency testing. Cohu's Interface Solutions Group delivers innovative technologies to solve complex test challenges with the core strength in power, thermal and RF applications. Different from our systems businesses, our products are consumables and create a steady stream of recurring revenue that is not based on test capital expenditures, but rather on the customers' need to keep production running 24/7. Additionally, lead times for our high-performance interface products are much shorter than systems products, and the ability to ramp production to support customers is essential. We deliver on these requirements by manufacturing a majority of our interface products in our Asian facilities, which also drives lower cost and is a key reason for gross margin increasing by approximately 300 basis points during full year '21 and continued margin increase moving forward as we direct more interface manufacturing into our Asia operations and away from higher-cost Europe and U.S. suppliers. We have 3 primary markets. In automotive, we expect robust and sustained growth driven by 2 subsegments: electrification and ADAS. Here, our customers need increasing power density and driving high-end computing requirements. In computing and networking, softness in PCs is being offset by growth in data center and AI. Both data center and AI are driven by the need for high interface speeds and increasing adoption of advanced packaging. Finally, in mobility and consumer, rapid adoption of 5G and its expanding frequencies into millimeter wave are increasing the need for cost-efficient solutions at the high end of the performance spectrum. Cost of test increases exponentially with frequency. And to make millimeter wave affordable, our customers are looking for simplified solutions. This has created an opportunity for Cohu to extend its technology into wafer test, growing our serviceable market. Cohu has a strong leadership position in automotive, which is driven by our large installed base of handlers and our broad contactor product line. Robust growth is projected in this segment, and there are 2 key mega trends that align with our strengths, it will drive Cohu's growth faster than the market. First is electrification, with silicon carbide demanding much higher current load at the interface. To solve this, we have engineered contactors to extend the current carrying capacity beyond today's technology by more than 30%. We are using new materials and designs that lower pin wear and that enable extended contactor life, resulting in a 50% lower cost. Second is ADAS driving higher computing power. As an example, Nvidia is projecting automotive processing requirements to increase 10x by 2030. This translates into processors that generate significant heat during test, negatively affecting yield results. By integrating thermal management features in our contactors that can be controlled by our test handlers, we are able to achieve greater thermal accuracy than today's solutions. Improved thermal accuracy translates into improved yield that has significant value to our customers. In addition to power and thermal, we have a core strength in high-frequency RF applications. This positions us well to capture opportunities in both the 5G mobility and data center markets, where demand for higher data rates is projecting to continue growing. The trend toward high frequency, smaller devices and advanced packaging significantly complicates test, leading to higher instrumentation and interface costs. In the case of data center applications, new protocols expand the I/O bandwidth, making them susceptible to cross time that reduces test yield. To address this, we developed a coaxial contactor that improves isolation by 2x existing solutions, ensuring better signal fidelity. Similarly, in 5G millimeter wave, we have developed a cost-effective pin technology that performs at frequencies up to 60 gigahertz. The new solution is more scalable and reduces cost by over 50%. Now I'm going to discuss an exciting opportunity to extend our RF technology to wafer testing and significantly expand our addressable market by approximately $300 million. As we discussed earlier, complexity and cost increase exponentially with high frequency. Traditional advanced probe card technologies are limited in their ability to operate at higher frequencies and scale to multisite testing. They typically can solve one of these challenges, but not both concurrently. Leveraging our RF technology, we have developed a multisite probe card that delivers at-speed performance up to 60 gigahertz that is needed for millimeter wave. We have also simplified the probe card with a unique direct attach construction technique, eliminating a costly component and source of noise in the signal chain to the instrumentation. Cohu's test interface revenue grew approximately 25% year-over-year in full year 2021. And I'm excited about the opportunities to continue growing at 3x the market rate over the next few years. In automotive, we are leveraging the large installed base of Cohu equipment to deliver active thermal contactors controlled by our handlers. In 5G millimeter wave, we are leveraging our contactor and semi-test expertise to develop new products and expand our addressable market. We are uniquely positioned to leverage our equipment expertise to solve our customers' test challenge and deliver a complete solution across all markets that Cohu serves. Equally important, we continue to grow gross margin as we increase our low-cost in-sourcing at our factory in the Philippines. Thank you. And next I would like to introduce you to Yves Hirschy, our Vice President and General Manager for the Inspection & Metrology business.

Good evening. Hello, everyone. This is Yves joining from our Inspection & Metrology Innovation Center in Switzerland. Our focus is to develop vision technology products like Neon that drove Cohu's rapid growth in the Inspection & Metrology market last year, delivering 130% revenue growth year-over-year. We are now working to bring to market new technologies for inspection and more precise solution for metrology of advanced packages. Advanced packages actually deliver more functionality by integrating multiple dies in package, thus increasing the quality requirements of each die in a stack. Today, we address 3 main markets. First is system-in-package, which integrates small form-factor wafer-level chip scale packages to deliver ultrafast mobile connectivity typically used in 5G applications. Next, we addressed the analog market, driven by automotive EV with a focus on emerging silicon carbide technology. This new semiconductor-based material delivers higher power efficiency that is critical for electrical vehicles and many industrial applications. Finally, we are expanding into inspection and metrology of 2.5D and 3D advanced packages, enabling the next generation of high-performance computing, advanced processors and also life critical decision-making automotive ADAS. Our customers face many complex challenges as they transition to system-in-package. This package technology brings smaller structures requiring higher inspection quality. It is critical for customers to identify defects and microcracks. The challenge is to differentiate will effect from cosmetic patterns and reduce over rejection. Cohu NV-Core provide leading-edge inspection in the standard and high resolution visual light spectrum, but also go further providing through infrared vision capability combined with deep learning to optimize yield. So infrared provides the ability to see microcracks on and below the surface of the device. Cohu has also developed deep learning algorithms to distinguish scratches from actual defect, cut potentially impact performance while scratches do not. The challenge then is to distinguish between the 2 in high-volume production. Our NV-Core vision technology has unique capability proven in high-speed production to find real defects and minimize over rejection. The benefit to our customers is a significant increasing yield. Depending on the customer device, we estimate that 1% yield increase deliver cost savings of $1 million per system per year. This explained the success of our Neon product, which integrates all necessary features for leading-edge inspection and metrology quality in volume production. The key challenge with automotive power modules is yield loss because the integrated multiple dies into a single module. One single die defect can lead to failure of the entire high-value model. For example, a module integrating 24 dies with 99.7% yield per die will decrease the final module yield down to 93%. The customer interest is then to ensure that every die is fully functional before assembly into the final module. Cohu offer a unique known good die solution to confirm the full functionality of each single-aided die via electrical test followed by visual inspection, enabling total quality from wafer to tape-pocket in 1 machine in 1 process flow. The outcome is a process capability that delivers up to 7% higher yield, processing known good dies for our applications. As previously mentioned, we are expanding our Inspection & Metrology expertise for high-performance digital devices. Advanced packages are more and more commonly used for critical automotive ADAS application as well as high-performance computing in data centers, traffics, artificial intelligence and any dedicated IN computing function. Our customers are faced with the challenge of meeting tight quality requirements in high-volume production answering quality by inspecting and measuring ever smaller features in larger and very expensive devices. We are developing a new Inspection & Metrology system for advanced packages, which enable detection of smaller defects in addition to increasing productivity by 30% and bringing readiness for industry for the whole factory automation. The plan is to release this disruptive product to market in the first half of 2022. In summary, we deliver value to our customers with higher inspection yield, accurate metrology and doing so at production speeds. We target to grow our Inspection & Metrology revenue 2x faster than the market over the next 3 years. Thank you for your time. And next, you will hear from Chris Bohrson, Senior Vice President of Cohu Global Customer Group.

Thank you, Yves, and hello, everyone. Today, I will give you an update on our service and data analytics businesses. As part of Cohu's recurring revenue, the service business includes the supply of spares, device kits, instrumentation board repairs and service contracts for our large installed base of systems. More recently, we started offering a software product called DI-Core for data intelligence and analytics. The value proposition for both services and DI-Core is enabling customers to improve equipment uptime, resulting in higher production output per system. Based on inputs from customers, the annual value of 1% higher uptime ranges from $10,000 to $400,000 per test cell. The $10,000 estimate is based on cost avoidance. However, because many of our customers can be capacity constrained, the $400,000 estimate is the value of lost revenue as customers may lose market share in the short term because they cannot easily add capacity. These estimates, of course, will vary by customer. Referring to the left-hand side of the page, we plan to grow the spares and board repair business with a continuously expanding global equipment fleet, which currently stands at approximately 23,500 systems and by promoting better spares management to customers with below-average uptime. Services is an attractive part of Cohu's portfolio. It is stable, growing year-on-year and delivers attractive gross margins of 50% plus. It represents the large non-CapEx-dependent part of Cohu's business along with the Interface business that Devin Sheridan described. On the right-hand side of the chart, I cover data analytics with Cohu's DI-Core software products. These software products provide customers the ability to monitor their equipment and proactively correct anomalies. Cohu's opportunity is to leverage the large installed base of equipment into a stable and highly profitable revenue stream by selling software licenses and subscriptions for functionality that will deliver greater equipment uptime and output. DI-Core is an umbrella name for Cohu's suite of software products focused on increasing equipment uptime and production output. The first product called Insight is outlined on the left-hand side of the page. Insight is available today and deployed with multiple customers. The key features include online monitoring of equipment and production, central management of equipment applications and alarm reporting. Customers invest in Insight to increase productivity, but also to reduce the cost of managing the test floor. On the right-hand side of the page, you will see another product called PDM Software. PDM is an industry acronym for predictive maintenance. This is a new product from Cohu that is currently undergoing beta evaluation with lead customers. To predict the useful life of critical components, Cohu's predictive maintenance software is a condition-based monitoring product that tracks several equipment parameters, making use of sensors available on our machines. Road map functionality will include machine learning computation. In real time, the software provides information to customers enabling proactive replacement of components and correction of anomalies. Like Insight, the value proposition of predictive maintenance is to reduce downtime and therefore, increase uptime and productivity of our customers' installed base of equipment. To provide an understanding of the value of Cohu's predictive maintenance software, on this page, I cover 2 use cases. These show results of the most recent beta valuations to lead customers. The first outlines real-time tracking of thermal performance. As background, Cohu's automation systems enable testing at extreme temperatures, including down to minus 45 degrees Celsius as shown. In normal production, anomalies can cause the testing temperature to be out of range. Today, the equipment detects these and disables those sites affected. This situation can continue for several days or longer until corrected by a service technician. The result is a loss of output during those days when the equipment is waiting for a service technician to be scheduled. DI-Core will detect this and send an alert, enabling an immediate fix, thereby increasing output. In the case study shown, the test cell running under DI-Core monitoring could deliver approximately 4% higher productivity. The lower example shows degradation of component functionality. In this case, we are tracking the time to pick up a device with vacuum. Using statistics and analysis, we track the performance and determine which component is degrading, enabling customers to replace and avoid reduced output. To summarize, these examples show significant productivity gains. Based on the value estimates for a percent gain uptime that I discussed on the previous slide, it is easy to understand why customers are interested to implement the DI-Core software suite in their fleet of Cohu equipment. Now that I have covered the specifics of Cohu's data analytics with DI-Core, I want to put this in perspective with the broader market opportunity. As shown by the diagram on the left, predictive maintenance is a large and growing market. According to market research, the opportunity for predictive maintenance software as part of the global manufacturing industry is sized at $1 billion and growing at 20% compound annual growth rate. My point here is that by developing products and expertise with our semiconductor customers, this will enable Cohu to look for adjacencies where we can apply our cumulative knowledge to further expand a high-value and high-margin software business. In conclusion, we are excited about the contribution that the services and data analytics businesses are having on Cohu's P&L. Both add significant value to our customers' operations, increased differentiation for our systems businesses and add to Cohu's stable recurring revenue at attractive margins. Also, over time, the expansion into data analytics offers new greenfield opportunities to expand the business by leveraging the deep understanding we have with the thousands of systems installed at Cohu customers globally. Thank you for your time. And next, you will hear from Jeff Jones, our CFO.

Thank you, Chris, and hello again. Now I'll walk through our recently expanded financial targets and summarize the markets, products and actions Cohu is taking to deliver shareholder value. Fiscal '21 was a strong growth year for Cohu, both financially and competitively, as we secured key customer wins in our Semi Test, Inspection & Metrology and Test Interface businesses. Design wins in high-growth segments, coupled with our strong services business and leadership in test automation, was the motivation to expand the target model in mid-December of last year to revenue of $1 billion, delivering an EPS of $4 and free cash flow equal to 18% of revenue. Additionally, the target model is based on an organic growth plan over a 3-year timeframe from fiscal '21 to fiscal '24. M&A continues to be a part of our strategy and could accelerate achievement of these financial targets. As you've heard from the Cohu team, our strategy for profitable growth is multidimensional, focusing on fast-growing market segments where Cohu can provide differentiated customer value with premium higher-margin products and services. We've structured Cohu's operating model to be profitable through industry cycles, enabling us to maximize profits and cash as revenue grows. Our priority for capital allocation is reinvestment in the business to support continued growth, and our strong balance sheet also supports potential M&A and returning cash to shareholders through ongoing share repurchases. Cohu has an impressive record of consistent revenue growth over the last 7 years, generated by a combination of organic investments and acquisitions. Removing approximately $27 million of fiscal '21 revenue from the PCB test business we divested in June of last year, we're targeting a CAGR of approximately 7% to achieve revenue of $1 billion over the next 3 years. Cohu's path to this revenue target includes contributions from the 4 growth businesses described earlier. These opportunities are not overly dependent on a particular market segment and are well distributed among our businesses. Semi Test represents the highest value opportunity. However, the Test Interface and Services growth represents stable recurring revenue. The Inspection & Metrology business delivered significant growth last year, and we believe that our differentiated technology will enable continued expansion, supporting customers' needs in advanced packaging. The strategy described today grows revenue contribution from premium higher-margin products at a faster rate than the automation business. Cohu's revenue has a significant recurring or consumable component that is more stable with gross margins above 50%. Recurring increases as the Interface and Services business grows and becomes a larger percentage of total revenue. Cohu has also demonstrated a steady track record of gross margin expansion over the last 7 years, yielding 10 points of margin improvement with target set and repeatedly achieved over time. Gross margin for the first half of 2022 is tracking to 46%, benefiting from growth in premium product sales and lower costs from increased insourcing of contactors. The plan is to expand gross margin to 49% with greater revenue contribution from Semi Test, Inspection & metrology and Test Interface, which will outpace the growth from the automation business. Cohu's priorities for cash generation and capital allocation are investments in technology and product development, consistent and meaningful debt repayment. The Term Loan B has been reduced so far by $265 million, including a $10 million repayment made in Q2. The remaining balance is approximately $85 million. Cash returned to shareholders through a $70 million share repurchase program, of which 550,000 shares have been repurchased through April of this year. Cohu's business is CapEx light. Capital expenditures over the last 3 years have averaged approximately $60 million per year, primarily related to expansion of contactor manufacturing. So why invest in Cohu? Because we've demonstrated the ability to execute our plans, delivering progressively stronger results over the last 7 years, because we have a strategy to grow revenue to $1 billion and achieve stronger profitability over the next 3 years. We're focusing on high-growth market segments where we provide premium products that help solve customers' increasingly complex test and inspection challenges and improve yield. Cohu's gross margin has grown to 46%, and our plan drives margin to 49%. A richer mix of Interface and Services revenue will also provide a more stable stream of profitable revenue through industry cycles. We've already demonstrated discipline in managing operating expenses, and increasing profitability strengthens free cash flow that we intend to use for product and technology development, potential M&A, consistent and meaningful debt repayment and share repurchases. In summary, Cohu is well positioned to capitalize on market opportunities and deliver financial results in line with our target model. This concludes our presentation, and now we'll move to the Q&A session.

[Operator Instructions] Our first question comes from Brian Chin with Stifel.

My apologies. I was on the webcast so trying to kind of fast forward into the call, sorry about that. Thanks so much for all the significant detail in the investor presentation. Very helpful. Maybe just to kind of begin, and this may tap some of the general managers of the segments. But -- and Luis, you may want to weigh in here as well. But I'm just curious, how does Cohu, at this stage, work across business lines to harness some of the revenue synergies that certainly are there apparent and probably being delivered upon here? But kind of curious how -- based on the organization of the company, based on the different levels of success in different business lines, how you're sort of really harnessing some of that -- those potential synergies?

Brian, good to hear from you again. So let me chime in here. I think it's pretty simple. I mean, at the end, the center, what we do is the customer, and we do run a centralized sales organization that -- with that, we do pull the business unit managers, the product marketing managers together to review sort of the customer opportunities and the customer dynamics. And it's really led by, like I said, by the sales team. And that's the whole company really revolves around the customers, and that's the integration point.

Okay. And if I go back to when you last increased the target model back in December, again, about 6 months or so ago, it seemed like Semi Test, there clearly was a lot of good business momentum that you've continued to demonstrate, I think, through the earnings report since then, Luis. I guess I'm curious, do you -- when you look out to the 2024 targets now, now that you've put a timeframe on it. Do you think that other areas maybe you're being too conservative about, maybe the momentum you could see from a revenue standpoint, through that timeframe? Again, it seems like a lot of progress that you're making in Semi Test. Do you think there's maybe still an aspect of conservatism even relative to your outlook?

Brian, this is Jeff. I would say we're -- I think we're tracking to where we thought we would be and then also in terms of the target model back in December when we updated the model, right? If you recall, we had just announced a design win in South Korea. And so in addition to that customer, there were other activities that were ongoing that were very positive, very favorable. And so seeing very good results there as well as in the Test Interface business as well as Inspection & Metrology. So I wouldn't say we're aggressive. I wouldn't say we're conservative on these targets. I think they're lining up pretty well to the activity and our success over the last, call it, 3 to 6 quarters.

Okay. And maybe something there to Luis or maybe Ian, back on the Semi Test business again. But what do you kind of expect to be the competitor response towards some of the initial significant successes you're seeing really broadening out the adoption of Diamondx. It is kind of historically a sticky business, where I think some of the gains here could prove beneficial for you. But I'm kind of curious what you think could be the sort of the competitive response you see over the horizon?

Yes. Good question, Brian. Why don't we have Ian answer that one.

Brian, thanks for the question. So as we described in our strategy, we're very focused on the mix of the market. And within that market, we think we have a very solid value proposition with the Diamondx, and we're competing with especially the larger competitors, liquid-cool strategy, which is very much focused on the high-performance computing market and with their universal platforms. For those competitive situations, we see that the larger competitors are still have to focus on that market. So their ability to stretch that platform down to the devices that we're targeting has some limits. On the flip side, there are a few other competitors that are more focused, more limited, smaller market share, but maybe focused on a single device within that category, let's say, power management. And we don't see those platforms being able to stretch out of their position, which really allows us to continue to expand on -- for our customers on the flexibility of the Diamondx platform and the value propositions that we're developing within our instruments.

[Operator Instructions] Our next question comes from Craig Ellis with B. Riley Securities.

And really appreciate all the information today, team. So I just wanted to start by following up on one of Brian's questions. So he asked about some of the momentum in the business since the target model was set. Jeff, I was hoping that you could just talk a little bit more about where there might be gives and takes, either things that may have been a little bit slower at least as we sit here today at midyear or very close to it or alternatively parts of the business where businesses simply performed better than the company might have expected, either because end markets are doing a little bit better, the company's execution is a little bit ahead of what the team might have thought 6 months ago.

Craig, yes. So I would say where we're doing a little bit better than perhaps anticipated or expected at this point, would be definitely on the tester, design wins and the revenue and the contribution there. We're also doing very well on both a design-win revenue front, but also margin improvement front with the test interface business. As you know, we continue to move more of the manufacturing in-house, and we do that in the Philippines. So we're seeing good progress there. And then also on Inspection & Metrology, there was just tremendous growth last year, and we're looking forward to continuing that, particularly when we announce a new product here at the end of this year, beginning of next year. And then I guess the one item that we're not talking much about today is automation. I would say, to date, the gross margin there has improved. We're in the low 40s sort of overall in that gross margin. So that business, it remains strong. It has moderated as we predicted as we said it would. It's moderated, but it's a profitable business, the price increases that customers helped to offset the increasing costs. So I would say, in general, Craig, I mean, across the board, I've touched on all of our business units doing a little bit better than originally anticipated.

Yes, that's helpful. And then I wanted to see if I could jump in to some questions for the SVP. So I'll start with Ian. Ian, from your presentation, it wasn't clear to me which of the market opportunities is the biggest incremental opportunity from here? And on the surface, maybe my inclination would be to point towards IoT because that's where there seems to be the greatest upside potential for further new customer penetration. How would you frame up a ranking of the incremental opportunities? And where should we expect that Cohu could be successful with new customer acquisition over the next year?

Go ahead, Ian. It's a good question, Craig.

Sure, Craig. Yes, great question. So if you look at the slides of the sort of the 3 main opportunities we outlined or outlined, I tried to give a sizing of each of the markets with $650 million for the analog part of the market, $275 million for the power management and about $208 million, roughly, right, all these are rough estimates for the IoT, which expands across multiple device segments. So that represents somewhat the overall size of opportunity. I would say they each have their own elements why they're attractive to us. On the analog side, we are fairly well penetrated within a fairly large number of customers. And being able to expand, once those customers have adopted us into more devices within that category, is a great opportunity for us. On the power management side, we're a little bit more behind in terms of the number of customers. But we see some good reasons why customers are going to look for more flexible platforms, and we've seen some of that in the recent design wins that we've had. And then finally, on the IoT side, that's certainly an area where from the end market, there's a lot of drive on growth, especially for the lower power, lower performance-oriented nodes that I think exude our Diamondx platform very well. But it is starting from a smaller size overall, but that also offers a good opportunity. So I would say, Craig, frankly, in summary, I think we have opportunities in all 3, and we're focused on growing within all 3.

Got it. And then the next question may be a combination for both you, Jeff and Devin. In the past, you've been able to provide us with a scoping of ADAS and EV mix as a percent of the automotive bucket. And I'm hoping you can do that. And then as we look at those, Devin, can you just give us a few things that you're focused on executing on both the ADAS side and the EV side as we look out through next year? And if you could provide any color on the degree to which, especially with EVs, customers are becoming more worried about battery supply and that being a potential gating factor to EV builds, that would be helpful.

Yes, Craig, I don't have that breakout off the top of my head here on the EV versus ADAS for automotive. I don't know if, Devin, if you got any insight into that, but...

The contractors.

Yes, exactly, for contactors. But overall, Craig, I don't have that data right here.

Yes. Craig, just one quick comment. Last time we talked about this was handler-related last year. And I think we're having a 25%, 30% of handlers going into EV and ADAS. I don't remember that we broke out the contactors, but let Devin comment.

Yes. In terms of the percentage of that business today, it's probably right around that 25% to 30% at this point. But where the growth is going to come more, the ADAS, as I put in the presentation, is growing pretty significantly, and that includes the sensors and also the processing that goes around that. But the electrification has been, I'll say, quite exciting. So the growth rate has been pretty significant. The interest is very significant, and that's predominantly because they're -- like you said, they're very interested in improving on the charging and the dry power. And so that's really driving a higher current density for us, right? So the contactor will need to be able to handle a much higher current load. And so as we put in the presentation, that's an area that we've done a lot of innovation. So there's some IP around that. And we've done a lot of work in analyzing and testing it and optimizing our solution to enable much higher current load. And that is very much in demand. We have a lot of customers that are asking for that, and we expect that to continue to increase as we go forward. And the demand there is, again, we see customers very much interested in getting a lot more help in that area.

Got it. Good to hear. And then lastly, before I hop back in the queue, I'll just direct one your way, Luis. Can you just talk about how you're looking at the inorganic growth landscape today? Maybe 6 months ago, valuations were at a level where that might have been difficult. They've certainly normalized quite considerably. How do you look at what's possible in the environment that we're in? And are there particular areas where you'd like to develop capability, technology, customer, et cetera, over the next 12 to 18 months?

Yes. Certainly, the environment has changed quite a bit, Craig. And it seems to remain pretty dynamic on a day-to-day basis almost. Well, our focus is pretty simple. It's the strategy we're laying out in this presentation. And if we see opportunities to execute on something that accelerates any one of these vectors that we're putting forth and assuming we can execute, we will do so. So we manage it as a process. It's -- we're not sitting idle waiting for a banker to show up with a great idea. We're actually investigating, scoping the landscape. We meet weekly on this. We have a person dedicated to it in corporate development. And obviously, the business unit people on this call get involved in some of the opportunities to assess. Whether it will or when something will happen, I can't tell you.

Our next question comes from Quinn Bolton with Needham & Company.

I appreciate all of the helpful information. I wanted to start off with Ian. In the past, Ian, it seems like new instrumentation has been key to some of your share gains, whether that's in the Display Driver segment or RedDragon and the RF side. Wondering as you look at your share aspirations expanding to analog, power management and IoT, do you require additional new instrumentation sets for those share aspirations? Or you feel like you've got the right set of instrumentation to accomplish those share objectives?

Yes. Good questions, Quinn. Go ahead, Ian.

Sure. Quinn, thanks for the question. So let me start with a lot of the share gains we've been driving, especially within the mixed-signal arena, have been really based on the Diamondx core platform value with a suite of instrumentations that have been developed over time. That being said, Diamondx is a relatively modern system, really only been developed over the last roughly 10 years. So it's had a fairly solid growth of new instruments. A lot of the success, I think, we've seen, especially in the mixed-signal arena, outside of -- I'll get to your question around new instruments, have really been a result of focus, focus in terms of our strategy, and we focused also our worldwide app support and focus on certain customers to gain share. And in the midst of that, over the last couple of years, we've had a few targeted new instruments come into the Diamondx that certainly helped. As an example, we took our RF -- our strong RF instrumentation for RFM, and we've adapted that for RF IoT and released that onto the Diamondx. Going forward, we do have a pretty solid R&D plan for new instruments. And as you can see, there's a fairly large market to go after between analog, power management and IoT. And there are some areas of that market that we're very strong today. And there's other areas that we can see we can drive some improvement versus what we have and what the competitors have. So we have a series of instruments coming out on the Diamondx over the next 2 years that we think were going to help us in those corners of the market that we want to strengthen. And again, it's back to our core strategy, really focused on diversifying into that mixed-signal market covering analog, power and RF IoT devices.

Great. Second question for Devin. You mentioned the in-sourcing opportunity on the Interface side to the Philippines' location. I know that's been something you guys have been working on now for some time. But just wondering, where are we in that opportunity? Do you still see significant business to in-source ahead of you? Or are we getting close to a steady state in terms of the percent of the business that will be in-sourced versus manufacturing -- manufactured outside?

Yes. Go ahead, Devin.

Yes. Okay. Yes, in terms of in-sourcing, where we're at today is roughly around probably about 55%, 60% today is what's being in-sourcing. We've made continuous progress there over the last 1.5 years, I would say. And so that's been going well. We have a steady climb going on at the moment. So by the end of the year, we think we're going to be upwards of 80% of the contactors coming internally in that point. What I would say in terms of percentage is that we would start to steady out, right? We'll continue to look at that percentage and decide if that's still the right number or should we be looking at a higher or lower rate of in-sourcing. But what I would add to that is that's not the end. So yes, we're going to in-source more but we're making other adjustments, right? So even the 20% that is outsourced, we have strategies about how to lower that cost. The other aspect, I would say, is even if you're in-sourcing 80%, there's efficiency gains that the factory is going to have over time. And so I would expect that to continue to improve. And then on top of that, what I'd also say is that we would expect -- where we've been investing some of our R&D resources in improving the manufacturing process. So how we do manufacturing. So instead of maybe a non-batch solution, but it's going into more of a batch process. And by doing that, we can lower the cost significantly. So we've got a lot of actions, I think, to drive further gross margin improvement. I wouldn't say at the end of the year, even if we're upwards toward our target that we're done with our gross margin improvement. I think we can go further than that.

Great. And then just 2, I guess, last ones for Jeff. Jeff, you mentioned the $10 million debt repayment. Obviously, the Fed seems to be in the -- at the beginning of an interest rate hike cycle, wondering if that changes your thoughts on repaying debt, especially if M&A activity may go given market conditions? And then second, I'm not fast enough to do the numbers, but it looks like all of the business outside of automation are growing double digits, yet you talked about a 7% CAGR to hit your $1 billion target model. Should we be thinking that the automation business, I know it was expected to be down in '22 from the strong '21. But from '22 to '24, does automation relatively -- is that relatively stable in the outlook to get to the $1 billion target model?

Quinn, yes, you're right. I'll start with the second one first. That is -- that's correct. It's stable. So as we said, it moderates and then it remains stable. We'll leverage that business, that leadership in that market to generate synergistic opportunities for the balance of our products, mainly contactors and the DI-Core and so forth.

And then any thoughts on the debt, Jeff?

Yes, absolutely. Yes. So yes, you're right, you're right, Quinn. So we're watching closely how the rate reacts. We happen to have it locked in at the moment through July, but certainly keep that into consideration as we move forward and very sensitive to that, to the increase.

Our next question comes from Hans Chung with D.A. Davidson.

So I guess my first question is regarding the RF probe card, the new SAM. And maybe just help me understand like what's the current landscape here? Or what potential opportunity you are looking for in your mid- to medium-term? And who might be the direct competitor here? And any momentum in terms of design win going on, et cetera.

Hans, this is Jeff. Yes, good questions for Devin to talk about the probe opportunity and competitors.

Yes. Thanks for the question. So yes, so really, we're in the early stages of the probe card opportunity we have. So we're -- millimeter wave is a big piece of that. It does extend a bit beyond millimeter wave. So in the short term, we've been in the kind of the single-digit range in terms of the revenue opportunity, but we expect that to grow at a much, much higher rate. So basically going into next year possibly doubling. And that's due to a number of activities we get going on with customers today. We've had some early design wins. We're expecting more. And we're very excited about this and our ability to take it further because one is we've got a pretty strong IP. I think we've got a great solution going in to solve a lot of problems our customers are having. And it's not easy to solve it, especially at millimeter wave because you're -- basically your tolerance at that frequency range are very small. So you have very low room for error there. Our competitors there, probably some of the bigger ones. So in terms of there's membrane manufacturing from a form factor, [ taylor probe ], they're all in this area. But the way that what we have seen in terms of generally the customers, how they're solving it, it's a difficult path. So what we've done is taken common materials that our customers are very used to. And generally, that means if they don't perform a millimeter wave frequency, but our IP then drives the performance of those materials up so that we're able to operate in that millimeter wave frequency. And we've demonstrated this, and we've had some -- say, some sales in this area, and we're very excited to ramp with our customers and drive much higher revenue here in the next year.

Got you. That's very helpful. So I guess next, just we have to kind of look at the old contributor to the gross margin improvement, let's say, to probably 49% in the next few years, then can you order -- like what the major contributor? I know this could be the mix and could be the contact in-sourcing or the manufacturing and efficiency improvement and so on. So just kind of maybe just walk through like the key contributors and then what would be the biggest one and then a smaller one?

Yes, you bet. I'll take that one, Hans. So for the first half of this year, our Q1 actual was roughly 46%. We guided again 46% in Q2. So in order to take it to 49%, it's -- it has a big impact -- mix has a big impact. You mentioned mix. In fact, we're expecting the growth of these businesses that we're talking about today to improve the gross margin over the next 3 years. So as Semi Test grows, we're expecting that to reach about 30% of our revenue. With the Test Interface business, we're expecting that to reach about 20%, and then the Inspection & Metrology reaching about 10%. So at that point, they become the majority of the revenue, the automation becomes about 40%. It's also important to note the systems versus recurring mix. The model is about 45% recurring and 55% systems. As you've seen on the most recent quarterly earnings presentations, that recurring in total, the gross margin there is over 50%. So by and large, it comes down to mix. We're also doing other things in operations, as Devin has elaborated on in terms of in-sourcing and gaining efficiencies as in-house manufacturing increases. So those are the major points that I would touch on today.

Got it. And then next question just can you help me understand just regarding the capital, the allocation, just do you have like a big picture, like how much the percentage is going to -- maybe to the -- return to shareholders versus the potential looking for M&A, acquisition and so on? So just kind of high-level thoughts that -- as we continue to go through the -- to 2024.

Yes, absolutely. The item that we're highly confident on is the reinvestment in the business through R&D and product development, and that's in the range of 10% to 12% of sales. The balance of your question is pretty difficult to answer, with M&A being part of the strategy, and there's a lot of uncertainty with M&A, not only from when a transaction would happen, but also the size of the transaction. So we want to have the dry powder to respond, to act quickly on opportunities. We believe -- we strongly believe that the business needs to continue to grow, has opportunities organically. But again, it's part of our strategy to continue with acquisitions. So it becomes difficult to put numbers behind that. Now we do see it -- it's important to continue to return capital to shareholders. As you know, we have a share repurchase program in place. Once we run through that share repurchase program, we'll have discussions again with the Board of Directors about reestablishing a share repurchase program or means to continue to deliver capital back to the shareholders.

And then just last one, a quick follow-up on the M&A related. So as you -- going forward, what kind of the strategy you would implement? I mean, in terms of the potential target, what kind of the business will be interesting to you guys? And I mean, basically, it could be like a very new market -- adjacent market or it could be just through consolidation or it's in the high -- very high synergies, very strategic or very high-margin kind of business? Just any kind of the color, like what kind of the strategy you are looking?

Yes, I think you've touched on many of the criteria. As Luis indicated, we're interested in M&A that accelerates the strategy that we've talked about here today. So in any of these growth vectors, acquisitions would be interesting to us. But even going beyond that, yes, there are criteria in terms of growth markets, in terms of gross margins and in terms of the synergies that we can generate out of any acquisition. So those are all internal metrics that we track. We have objectives. At the end of the day, we do measure the internal rate of return. That has to hit a threshold of 20% or higher. So I would say from a market opportunity, it would be everything we talked about today and accelerating that strategy. And then yes, the criteria for an actionable target would be gross margin, market growth, market position and potential synergies.

Our next question comes from Toshiya Hari with Goldman Sachs.

I had 2 questions as well. First, on the data analytics business. I think you guys talked about a SAM of I think roughly $25 million today, going to $35 million in a couple of years. I think in one of the slides, you also had the broader predictive maintenance software market being about $1 billion. And I think you mentioned your ability to potentially tap into that broader market over time. Just curious how you're thinking about your ability there to again grow beyond the $25 million SAM? And what kind of timeline we should be thinking about as we monitor your progress?

Toshiya, this is Chris. So I think the way to think -- we think about data analytics is, first of all, we do have a big opportunity within the Cohu installed base that we really just have started to tap. And the -- our intent with that would be to develop additional expertise, which we could then leverage into looking at adjacencies and then think about how to attack those adjacencies. So I would think about that as a kind of a midterm because we do have some progress to make on the Cohu installed base. And as all along the way, we'll look at organic and inorganic opportunities in order to expand.

Great. And then my second question is for you, Jeff. Just on the free cash flow margin target of 18%, obviously, significantly higher relative to what you achieved in '21. You're guiding to profitability, obviously, higher than what you achieved in '21. So I'm sure that's a big part of that. But anything beyond your margins improving over the next couple of years that drives free cash flow margins to that 18% number? And specifically, I'd be curious what you're assuming for working capital over the next couple of years?

Toshiya, yes, absolutely, driving that number higher through profitability, also improving management of the assets, particularly inventory and receivables. In '21, I mean coming out of '20 and the steep ramp that we hit in 2021 took a lot of cash to finance the inventory, to finance the receivables. And so that had an impact on our working capital, had an impact on free cash flow. Typically, you see that in this business as customers ramp, we have to make the investment in inventory and the receivables. So I mean, that's what happened in '21, where we delivered about $85 million of free cash flow or about 10% of sales. So yes, I feel good about the ability to drive that to $1 billion -- excuse me, to 18% of $1 billion.

Jeff, one quick follow-up on the inventory dynamic. I guess, quite a few, maybe not so much your peers, but semiconductor companies have talked about potentially carrying more inventory going forward, just given the ongoing sort of episode of shortages and supply chain dislocations. But for you guys, should we expect anything that's different going forward vis-a-vis how you've been operating over the past couple of years? Or is there really no change in how you think about your setup on the manufacturing and inventory management side?

No. I mean, thanks for mentioning that. That has been one of the drivers as well. In addition to the ramp, we've also got out to secure inventory because of the supply chain shortages. Not completely across the board, but obviously, in those areas and those products that have become hard to get, we've gone out and secured more than we typically would have. But I hope at some point that we're able to relax that. But it looks like these constraints will be around for the next few quarters anyway. So I would imagine that inventory -- planning that inventory is going to remain somewhat elevated over the next near term, if you will.

Our next question comes from Craig Ellis of B. Riley Securities.

I wanted to dig a little bit deeper into software, where we've got the $35 million TAM out there in 2024. So when I look at that relative to the current installed base of tools, it equates to about $1,500 per installed tool. So one, I wanted to see if you could help us better understand which tools the software would be most relevant for since most enterprise software would be attaching at a much higher rate than $1,500? So I suspect it may not be relevant for all tools. Two, can you talk about the growth in the application suite, not just over the next couple of years, but maybe a little bit more about what the vision is 3 to 5 years from now? So for a business that's small but quite powerful for gross margins, we have a better sense of the intermediate to long-term potential of the business. And then, Jeff, you've been -- excuse me, Luis, you've been asked a few times about M&A, including by myself. How would software rank on the list of priorities relative to some of the other businesses?

So Craig, this is Chris. Let me first talk about the market size to give a perspective on that. So when we size the market, I think in Luis's slide, and I mentioned in my slide, there's 23,500 systems. We look at a subset of that because those are the systems that we really think customers will be most interested in. And the way to think about the subset is those are really the more reason for modern handlers. That's the initial target for the DI-Core software suite. So the actual amount per handler that we think about is closer to, say, $4,000 or $5,000 per year than it is to the $1,500 that you mentioned because the -- obviously, the denominator are smaller. Secondly, in terms of the perspective on longer term, we have a product right now called Insight, which we've introduced. That product is primarily focused on to put it at a high level really on monitoring and managing the installed base of handlers. We then are in beta right now with the predictive maintenance software, which should provide customers the ability for -- to get higher uptime and higher output because they can now anticipate problems and anomalies and correct those in advance. Beyond that, we are looking at technology additions to that, which would include machine learning for additional data collection and analysis for additional uptime improvement. And then even beyond that, we're looking at more, what I would call, device tracking, where you're tracking thermal performance or other aspects of the device in order for us to look at yield improvement. So those are sort of the categories that I would think about in terms of the road map going forward.

Let me step in on the M&A here. Craig, it does rank high because it is part of our strategy. But as you can imagine, this is, again, low small numbers. Whatever we're doing here today or even in the near future would still be relatively small for a $1 billion revenue target, but obviously high margin, interesting in terms of applicability across our equipment base and potentially more over time. But it's a developing story like it was when we got into the interface contactor businesses about 6 years ago and when we started launching Inspection & Metrology 4 years ago. So it's still in the early infancy. We have a lot to learn, but we think we have a pretty big installed base of our own equipment to mine for information and translate into value to customers and ourselves and learn from it and understand how we can continue to deploy that forward. So it's kind of stay tuned. The story is developing, and we're learning and adapting as we go along. But yes, it is an area of high interest for us.

The next question comes from Brian Chin with Stifel.

Maybe, Jeff, can I just ask you about a comment you made earlier? I know it's not really the explicit focus here of the presentation, but I think you said Cohu certainly has reoriented the business to remain profitable across industry cycles. And you're obviously sharing kind of how you expect to achieve the target model. But what could potentially play sort of a normalized earnings or P&L for the company? I mean we've sort of sketched it out, this is our projection. But maybe in and around $2.50, maybe that's sort of like a high-teens op margin. But again, a lot of caveats to that. But just kind of curious where you might place that. And even if not quantitatively -- qualitatively, I think clearly, the dry powder is here for kind of reduced cyclicality as the business sort of composition changes over time.

Brian, just to be clear, you're asking my thoughts on normalized rates for cyclicality or both?

Yes. So like through the cycle, what you think a normalized earnings level could be for the company? Certainly, in a good environment, you've laid out why $4 is achievable. You expect to remain profitable across the cycle. But -- I'm sorry to put you on the spot, but is there sort of a normalized earnings level. We've put it around $2.50, you kind of think about for the business.

Yes, I think that -- I think you're in the right range. I think that $2.50 is a bit of a sweet spot. As you know, the business can move quarter-to-quarter based on cycles, based on customer buying patterns and so forth. So in terms of some of the, call it, cyclicality that we've seen on a quarter-over-quarter basis, that tends to be a little bit higher than on a year-over-year basis. So -- and we typically would follow that normal seasonality. So when we say roughly $2.50, it would be a little bit lower -- seasonally lower Q4 and Q1, stronger Q2 and Q3. Given the growth in the recurring business through the contactor business, the strong recurring business we have with all of the systems in the field. Certainly, that business is less susceptible to any cyclicality. And then with the broadening of the tester business beyond RF, we anticipate that, that will also have a bit of a muting impact, if you will, on cyclicality. So I would say sort of quarter-over-quarter, we're still going to be subject to customer buying patterns, things of that nature. But perhaps 10% -- 10% to 15% maybe quarter-over-quarter. And particularly, if we look back in history, I think we can support that. And then on a year-over-year basis, we think of cyclicality in single-digit, maybe high single-digit, at least over time. That's what we've seen.

Yes, here. We're not targeting to be $1 billion, [ $4 ] EPS on the best year ever. We're obviously not accounting for a recession either. So there are worst-case scenarios out there when the macroeconomic environment goes to hell basically. But we're looking at the company performing annually at that level that we're targeting to achieve here in the next 3 years. And then all things being equal, which is not in this industry, as we all know, all things being equal, operating at that plateau and then freight in the plant should go forward from there. I think the number that Jeff just quoted is sort of where you are now if you take a peak-to-trough average. But that's not where we want to be in 3 years' time.

Yes. That makes sense. And I think the handler business could operate more on a cyclical frequency. But these other businesses, they are ones where you basically would establish a higher foundational level as you sort of tap into those segments. And maybe one last question.

Go ahead, Brian. I want to make a comment about the handler business too, but go ahead.

Yes. Go ahead. Sorry.

I was going to say the handler business, too, we have, over the last 2, 3 -- I think, 2.5 actually years, we really have resized the R&D investment in it to a point that it is much better sustain now the sort of the cyclicality of the businesses, if you will. I mean it operates at a -- definitely at a much lower than corporate consolidated R&D investment level. It doesn't require much of a field application. So it is a business that, yes, it does have a lapped degree of cyclicality in the top line, but it is substantially skinnier down at the operating expense level.

Got it. That's helpful. And just kind of one last thing. The -- and this sort of cuts across a lot of the presenters and the slides, but increasing customer productivity output and yields, that cuts across. Yes, that's basically a core value proposition. It's also a way you win business, the way you sustain business and intrinsically a way you lower cost, right, cost of test. I think there's concerns out there that the cyclical aspect of sort of what's driving the business could soften a little bit. But I'd imagine structurally, with a lot of your customers that you talk to, I mean, you really struck a cord here, right? Were they -- yes, maybe there's kind of a little bit of a cyclical aspect to this today. But kind of structurally, most of them are probably faring there's going to be too little supply to need too much demand over the next several years, certainly into the back end of the decade. So I mean do you think the market generally is just sort of a little bit too narrowly focused in terms of thinking about the cyclical aspect of this and not sort of really saying this out to think about sort of where this train is going ultimately? And how you've really tapped into something in terms of flexibility, functionality, small form factor at a relatively lower price point. I mean it seems like it could be fairly potent over time.

Yes, that's our view, Brian. That's our view. I think Ian put it well relative to the Diamondx tester. It is a low-cost basically air-cooled universal platform we have. We have an instrumentation suite for that. We're broadening that instrumentation suite over the next couple of years, probably will continue even beyond that, obviously. But we have some serious investments to make that happen and deliver a low-cost solution to market. I do think that there is a very high degree of focus on cyclicality amongst -- in the industry and amongst investors, right? And obviously, the business has -- it's a capital-intensity business, so it has its ups and downs. But when we look at our business over the last 10 years and you look at a quarter-to-quarter fluctuation, you don't get more than a plus- or minus-15% quarter-to-quarter in aggregate. And if you look at even average of quarter-to-quarter over -- of over that 10-year period, you really end up with single digit. So that concept of cyclicality, I think it's a little bit of history and perhaps even more so history of when Cohu was a $300 million predominantly handler company, today operating at $800 million and some -- $900 million, it's a different business profile when it comes to that. We have multiple market segments, multiple products. And it's -- they kind of offset each other, and we have a very large recurring business stream as well, revenue stream that I think the cyclicality is a little overblown, to be honest, assume.

Our next question comes from David Duley with Steelhead.

I'm sorry, I had a little technical difficulty earlier. I just wanted to ask about the Semi Test business. You've listed your -- the growth rate of the industry, I guess, roughly at 6%, and your target revenue is 14% growth. The reason that you think you can grow more than 2x the market, I am assuming are these new product segments that you've talked about? Maybe you could just kind of handicap and help us understand where the most growth is going to come from, from these 3 areas that allow you to essentially outgrow the market?

Dave, we'll pass that over to Ian.

Thanks, Dave. So I think I'd start with our view of the future at growing at 14% is really to continue the momentum we've been on in terms of gaining share and really getting a fairly large $1.5 billion to $1.8 billion market to continue to see the value of our platform, our platform strategy. And that's really underlying it, right, why can't we outgrow the market. And as you asked, I think this is similar to a previous question, which of these markets really represent the most opportunity? I think we actually have taken the entire Semi Test TAM, which in the last couple of years has grown significantly and really focused in on the area that we think, one, has a good tie to end market growth, right? These mixed-signal products are really the core of what allows cars to sense things better, what allows wearables on human beings, right, to measure our health statistics better. So there's some underlying reasons why these particular products are going to grow with these end markets. And then two, we also have sort of narrowed our focus to just a subset of the entire market, where we've sort of proven to ourselves that we have a differentiated platform. And we're investing heavily just in those markets to penetrate deeper. And like I said, continue the momentum that we've been on. We've been on a 30% CAGR over the last 2-year growth path. So we feel like a 14% CAGR is a rational number to aim at and well within our ability to do so over the next 3 years.

And as far as the underlying unit growth, I see unit growth assumptions, if you're kind of assuming that your market grows 6%, can we assume that your assumptions for unit volumes are roughly around the same? And if unit volumes happen to grow, let's say, at 10% over the next 3 or 4 years, the period of this '21 to '24 that you're showing in your slides here. What would happen to the growth rate of your Test business?

That's a great question, right, because we did -- we do look at not only the ATE growth rate, but also the underlying semiconductor growth rate in terms of revenue, but also even below that, the unit volume growth as well. So in many cases, the unit volume is actually growing higher than the overall ATE rate that we see and over -- higher, frankly, than the semiconductor revenue, our customers' revenue per year. And it varies in the different marketplaces. But in sort of a recent set of data that we've looked at for these numbers, the markets we're looking at from a semiconductor test are growing between 6% to 8%. And in some cases, the higher volume applications, like the automotive ASSPs that we're targeting, are growing closer to 10% to 12%. So I think you're right that the underlying unit volumes are growing faster than the market size that we're describing. And a piece of that is our value proposition is better efficiency. So we're going out there with systems that offer more throughput for tester versus the existing systems, and that allows us to displace them. But it also means that we're offering a lower cost of test that these -- our customers really demand. So I think your premise is exactly right. Unit volumes are growing faster than the underlying market rate, and we intend to grow our business and our share faster because we're going to improve on the efficiency of the tester.

Okay. One other question for me as far as the handler business goes. We've certainly seen automotive unit volumes not be at what we would initially have expected for a variety of reasons. Maybe we fast forward 6 or 9 months, and we're back to normal production levels in the automotive market. I guess, first off, what do you think the unit volume growth in automotive can be over the next couple of years? And then how would that translate to your handler business starting to grow again? Or what kind of growth rate it could achieve?

So you're asking specifically on the handler business side, Dave, not the tester in this case?

Yes.

Okay. Well, we saw...

You can talk about the tester side, too, if you like. That's fine.

No, it's just that you pivoted there. I was just making sure that, that was the intention. We saw obviously a bump in the beginning of 2021 on the handler business, kind of a snapback from a very constrained 2020, as we all know. And as we spoke even in the middle of last year, we said we expected a moderation on the handler business, which we're seeing it now. It's still a strong business, but it moderated from that bump that we saw in the first half of last year. What we expect the handler business to be is it's going to be -- sort of it's going to continue to grow with the automotive business. But basically back to the '21 level, if you will, it's -- we expect it to be roughly flat for the 3-year period that we are outlining here. In essence, it is a moderation after a snapback in 2021 and then a steady climb back to the same level. Vis-a-vis if you look at '21 to '24 essentially flat, it goes down and then it comes back up to the same level.

Now is there an opportunity or is there a chance that the market can grow again in this period if automotive production snaps back or if EVs growth is higher? Or what could lead to upside in the handler market over -- in, let's say, 2023 or 2024?

I don't know. I mean we do expect the automotive business to grow indeed. But like I said, it basically just grows to recover from the moderation after the snapback in 2021. So it's not that the industry is not growing, it's that we have a high bar for starters in 2021 and then moderate down in 2022 and then slowly climb its way back to 2021 level. So the starting point being 2021, and our analysis here was a high bar for handlers and then it contracts in '22 and then steadily slowly grows to that same level in '24. Now it's a small growth rate relative to everything else. And from the starting point, like I said, it's about flat.

And I'm not showing any further questions at this time. I'd like to turn the call back to Jeff Jones for any closing remarks.

Okay. Thank you. And on behalf of the entire Cohu team, I'd like to thank everyone for participating in today's event and look forward to meeting with you again, real soon. Thank you.

Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.